2. Dividend preference theory (bird-in-the-hand theory)

Despite some theoretical assertions, many investors do care a great deal about dividends. They believe that sure dividends today (a bird in the hand) are less risky than a return in the form of capital gains in the future.

The following table lists some factors that might affect an investors preference for dividends. Indicate whether the given factors are likely to make an investor prefer to receive more or fewer dividends.

Factor	Investors Will Likely Prefer . . .
	More Dividends	Fewer Dividends
When an investor dies, his or her heirs are not liable for taxes on the capital gains generated during the investors life. They are only liable for the capital gains earned since the investors death.
An investor is on a fixed income and depends on returns from investment.
Investors believe in the bird-in-the-hand theory.

In examining investors preferences for dividends, it is useful to begin with the concept of dividend irrelevance. Dividend irrelevance suggests that in a world with no taxes or brokerage (or transaction) costs, firms and investors are indifferent to the paying or receiving of dividends.

However, as these restrictions are relaxed, various factors suggest that firms should pursue high or low payouts. One such factor is:

Some investors have a desire for current income from their investments.

Based on the factor described, investors, in general, will tend to favor payout ratio.